Defense Department graphic by Regina Ali
- Ben Carlson, director of institutional asset management at $1.2 billion Ritholtz Wealth Management, is tired of seeing investors get swindled by clever sales techniques.
- He notes how a confluence of slick storytelling and inherent human biases leave investors susceptible to fraud.
- Carlson's new book "Don't Fall For It" aims to teach investors timeless business and financial lessons through the use of historical anecdotes.
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Financial fraud and scams have a rich history.
From a Nigerian Prince who claims to have a pile of cash with your name on it, to Victor Lustig, the man who sold the Eiffel Tower twice, there's seemingly never a shortage of scam artists trying to swindle you.
Incredibly, this type of behavior still exists today. According to recent report, Nigerian prince-style emails still garner about $700,000 a year from unsuspecting victims.
Ben Carlson, director of institutional asset management at $1.2 billion Ritholtz Wealth Management, is tired of seeing investors fall for the same folly over and over.
"I think there's a lot more that people can learn from watching the mistakes of others than they can really the successes of others," he said "The Long View," an investing podcast. "It's almost the same ones over and over again. People keep getting duped."
To get to the bottom of this phenomenon, Carlson started digging through centuries worth of scams - and a series of common threads started to emerge.
It all boils down to the ability to tell a good story that appeals to the biases humans are naturally susceptible to.
"These people just have the ability to sell anyone anything at any time," he said in reference to the con artists. "The way that they can spin stories, and get people to do what they say is just really masterful in a lot of ways."
What's more, Carlson says that victims of financial fraud aren't necessarily naive, uneducated, or unsuccessful. He notes that dentists, doctors, lawyers, and business people are equally as fallible as well.
"Sometimes it is those people who have just a little bit of knowledge, and know just enough to be harmful," he said. "Sometimes these people assume that because they're intelligent and have success in one arena in life that it should easily translate over to another. And in terms of the markets and investing, as we know, that's not always the case."
He continued: "More times that not, those people end up out-thinking themselves and doing much worse than they should."
With all of that under consideration, Carlson relays three ways to avoid financial scams and the get-rich-quick "lottery ticket mentality" investors often fall prey to.
1. Understand your investments
"A lot of these scams that I came across really were just done in a complex nature, and was kind of this 'just trust us, we got this, don't worry about it' kind of attitude, and I think those days should be over," he said. "It sounds so simple and easy, but knowing what you own and why you own it ... in terms of an investment."
Carlson says that lack of transparency is a red flag. If someone is unwilling to explain the inner workings of an investment to you, it's best to head in the other direction.
To provide yet another layer of safety, Carlson recommends having another set of trained eyes vet at any potential investments before pulling the trigger on a new venture.
2. Avoid the "lottery ticket mentality"
Carlson says that the key to avoiding fraud and sound investing is carried out through delayed gratification. If you're hearing a get-rich-quick pitch expounding outlandish returns, it's more than likely too good to be true.
"I think a bull market is one of the times where this stuff flourishes almost more than any other," he said. "You have these situations where expected returns are getting lower, and especially in this environment, interest rates are going lower."
He continued: "So, people are pushed out on the risk spectrum to earn higher returns and take more risks than they're probably willing to take, or need to take."
As a rule of thumb, he says it's a good idea to be aware of the market environment you're in, and use that as a measuring stick. If the US Treasury 10-year bond is yielding 1.31%, and someone is offering you 10% returns with no downside, that should probably give an investor pause.
3. Ruthlessly filter
Carlson recommends putting rules and filters in place about what you will or won't invest in. This way, you won't be nearly as susceptible to emotion and temptation when an risky-sounding opportunity arrives.
He suggests having a "too hard" pile, made famous by arguably the world's most renowned investor, Warren Buffett, for ideas that you don't understand or are too complex to nail down.
He says that when all is said and done, the things you say "no" to will have a much greater impact on your finances than the things you say "yes" to.